by Adam Hartung | May 30, 2014 | Current Affairs, In the Swamp, In the Whirlpool, Leadership, Sports, Web/Tech
Anyone who reads my column knows I’ve been no fan of Steve Ballmer as CEO of Microsoft. On multiple occasions I chastised him for bad decisions around investing corporate funds in products that are unlikely to succeed. I even called him the worst CEO in America. The Washington Post even had difficulty finding reputable folks to disagree with my argument.
Unfortunately, Microsoft suffered under Mr. Ballmer. And Windows 8, as well as the Surface tablet, have come nowhere close to what was expected for their sales – and their ability to keep Microsoft relevant in a fast changing personal technology marketplace. In almost all regards, Mr. Ballmer was simply a terrible leader, largely because he had no understanding of business/product lifecycles.
Microsoft was founded by Bill Gates, who did a remarkable job of taking a start-up company from the Wellspring of an idea into one of the fastest growing adolescents of any American company.
Under Mr. Gates leadership Microsoft single-handedly overtook the original PC innovator – Apple – and left it a niche company on the edge of bankruptcy in little over a decade.
Mr. Gates kept Microsoft’s growth constantly in the double digits by not only making superior operating system software, but by pushing the company into application software which dominated the desktop (MS Office.) And when the internet came along he had the vision to be out front with Internet Explorer which crushed early innovator, and market maker, Netscape.
But then Mr. Gates turned the company over to Mr. Ballmer. And Mr. Ballmer was a leader lacking vision, or innovation. Instead of pushing Microsoft into new markets, as had Mr. Gates, he allowed the company to fixate on constant upgrades to the products which made it dominant – Windows and Office. Instead of keeping Microsoft in the Rapids of growth, he offered up a leadership designed to simply keep the company from going backward. He felt that Microsoft was a company that was “mature” and thus in need of ongoing enhancement, but not much in the way of real innovation. He trusted the market to keep growing, indefinitely, if he merely kept improving the products handed him.
As a result Microsoft stagnated. A “Reinvention Gap” developed as Vista, Windows 7, then Windows 8 and one after another Office updates did nothing to develop new customers, or new markets. Microsoft was resting on its old laurels – monopolistic control over desktop/laptop markets – without doing anything to create new markets which would keep it on the old growth trajectory of the Gates era.
Things didn’t look too bad for several years because people kept buying traditional PCs. And Ballmer famously laughed at products like Linux or Unix – and then later at entertainment devices, smart phones and tablets – as Microsoft launched, but then abandoned products like Zune, Windows CE phones and its own tablet. Ballmer kept thinking that all the market wanted was a faster, cheaper PC. Not anything really new.
And he was dead wrong. The Reinvention Gap emerged to the public when Apple came along with the iPod, iTunes, iPhone and iPad. These changed the game on Microsoft, and no longer was it good enough to simply have a better edition of an outdated technology. As PC sales began declining it was clear that Ballmer’s leadership had left the company in the Swamp, fighting off alligators and swatting at mosquitos with no strategy for how it would regain relevance against all these new competitors.
So the Board pushed him out, and demoted Gates off the Chairman’s throne. A big move, but likely too late. Fewer than 7% of companies that wander into the Swamp avoid the Whirlpool of demise. Think Univac, Wang, Lanier, DEC, Cray, Sun Microsystems (or Circuit City, Montgomery Wards, Sears.) The new CEO, Satya Nadella, has a much, much more difficult job than almost anyone thinks. Changing the trajectory of Microsoft now, after more than a decade creating the Reinvention Gap, is a task rarely accomplished. So rare we make heros of leaders who do it (Steve Jobs, Lou Gerstner, Lee Iacocca.)
So what will happen at the Clippers?
Critically, owning an NBA team is nothing like competing in the real business world. It is a closed marketplace. New competitors are not allowed, unless the current owners decide to bring in a new team. Your revenues are not just dependent upon you, but are even shared amongst the other teams. In fact your revenues aren’t even that closely tied to winning and losing. Season tickets are bought in advance, and with so many games away from home a team can do quite poorly and still generate revenue – and profit – for the owner. And this season the Indiana Pacers demonstrated that even while losing, fans will come to games. And the Philadelphia 76ers drew crowds to see if they would set a new record for the most consecutive games lost.
In America the major sports only modestly overlap, so you have a clear season to appeal to fans. And even if you don’t make it into the playoffs, you still share in the profits from games played by other teams. As a business, a team doesn’t need to win a championship to generate revenue – or make a profit. In fact, the opposite can be true as Wayne Huizenga learned owning the Championship winning Florida Marlins baseball team. He payed so much for the top players that he lost money, and ended up busting up the team and selling the franchise!
In short, owning a sports franchise doesn’t require the owner to understand lifecycles. You don’t have to understand much about business, or about business competition. You are protected from competitors, and as one of a select few in the club everyone actually works together – in a wholly uncompetitive way – to insure that everyone makes as much money as possible. You don’t even have to know anything about managing people, because you hire coaches to deal with players, and PR folks to deal with fans and media. And as said before whether or not you win games really doesn’t have much to do with how much money you make.
Most sports franchise owners are known more for their idiosyncrasies than their business acumen. They can be loud and obnoxious all they want (with very few limits.) And now that Mr. Ballmer has no investors to deal with – or for that matter vendors or cooperative parties in a complex ecosystem like personal technology – he doesn’t have to fret about understanding where markets are headed or how to compete in the future.
When it comes to acting like a person who knows little about business, but has a huge ego, fiery temper and loves to be obnoxious there is no better job than being a sports franchise owner. Mr. Ballmer should fit right in.
by Adam Hartung | May 8, 2014 | Current Affairs, Leadership
Lots of press this week about Target’s CEO and Chairman, Gregg Steinhafel, apparently being forced out. Blame reached the top job after the successful cyber attack on the company last year. But investors, and customers, may regret this somewhat Board level over-reaction to a mounting global problem.
Richard Clark is probably America’s foremost authority on cyber attacks. He was on America’s National Security Council, and headed the counter-terrorism section. Since leaving government he has increasingly focused on cyber attacks, and advised corporations.
In early 2013 I met Mr. Clark after hearing him speak at a National Association of Corporate Directors meeting. He was surprisingly candid in his comments at the meeting, and after. He pointed out that EVERY company in America was being randomly targeted by cyber criminals, and that EVERY company would have an intrusion. He said it was impossible to do business without working on-line, and simultaneously it was impossible to think any company – of any size – could stop an attack from successfully getting into the company. The only questions one should focus on answering were “How fast can you discover the attack? How well can you contain it? What can you learn to at least stop that from happening again?”
So, while the Target attack was large, and not discovered as early as anyone would like, to think that Target is in some way wildly poor at security or protecting its customers is simply naive. Several other large retailers have also had attacks, include Nieman Marcus and Michael’s, and it was probably bad luck that Target was the first to have such a big problem happen, and at such a bad time, than anything particularly weak about Target.
We now know that all retailers are trying to learn from this, and every corporation is raising its awareness and actions to improve cyber security. But someone will be next. Target wasn’t the first, and won’t be the last. Companies everywhere, working with law enforcement, are all reacting to this new form of crime. So firing the CEO, 2 months after firing the CIO (Chief Information Officer), makes for good press, but it is more symbolic than meaningful. It won’t stop the hackers.
Where this decision does have great importance is to shareholders and customers. Target has been a decent company for its constituents under this CEO, and done far better than some of its competitors. The share price has doubled in the last 5 years, and Target has proven a capable competitor to Wal-Mart while other retailers have been going out of business (Filene’s Basement, Circuit City, Linens & Things, Dots, etc.) or losing all relevancy (like Abercrombie and Fitch and Best Buy.) And Target has been at least holding its own while some chains have been closing stores like crazy (Radio Shack 1,100 stores, Family Dollar 370 stores, Office Depot 400 stores, etc.)
Just compare Target’s performance to JCPenney, who’s CEO was fired after screwing up the business far worse than the cyber attack hurt Target. Or, look at Sears Holdings. CEO Ed Lampert was heralded as a hero 6 years ago, but since then the company he leads has had 28 straight quarters of declining sales, and closed 305 stores since 2010. Kmart has become a complete non-competitor in discounting, and Sears has lost all relevancy as a chain as it has been outflanked on all sides. CEO Lampert has constantly whittled away at the company’s value, and just this week told shareholders that they can simply plan on more store closings in the future.
And vaunted Wal-Mart is undergoing a federal investigation for bribing government officials in Mexico to prop up its business. Wal-Mart is constantly under attack by its employees for shady business practices, and even lost a National Labor Relations Board case regarding its hours and pay practices. And Wal-Mart remains a lightning rod for controversy as it fights with big cities like Chicago and Washington, DC about its ability to open stores, while Target has flourished in communities large and small with work practices considered acceptable. And Target has avoided these sort of internally generated management scandals.
CEOs, and Boards of Directors, across the nation have been seriously addressing cyber security for the last couple of years. Awareness, and protective measures, are up considerably. But there will be future attacks, and some will succeed. It is unclear blaming the CEO for these problems makes any sense – unless there is egregious incompetence.
On the other hand, finding a CEO that can grow a business like Target, in a tough retail market, is not easy. Destroying KMart, while battling Wal-Mart, and still trying to figure out how to compete with Amazon.com is a remarkably difficult job. Perhaps the toughest CEO job in the country. Steinhafel had performed better than most. Investors, and customers, may soon regret that he’s not still leading Target.
by Adam Hartung | Apr 30, 2014 | Current Affairs, Innovation, Leadership
Economic growth is a great thing. When the economy booms people make more, so they pay more income taxes. They spend more, which generates more sales tax. They upgrade homes and buy bigger homes, which have higher property taxes. But even though they pay more dollars in taxes, people are happy because they have more cash, and often the percent of their income spent overall on taxes is lower.
A virtuous circle where everyone benefits. Growth helps the citizens, and the community prospers.
For the industrial era, this virtuous circle was great for Illinois. Farmlands continued to prosper with bountiful crops, while new manufacturing jobs created higher incomes for those leaving the farms. The roadways and airports grew, while income taxes remained almost paltry by national standards. And Illinois could boast some of the country’s best public schools even while property taxes were below national averages. This growth environment kept locals in the state, and attracted people from the plains, other parts of the midwest, south and northeast as well as immigrants from foreign lands. Industrial growth propelled a great environment.
Last week many people were surprised by a recent Gallup survey showing that Illinois leads the USA in people wanting to leave their home state. A whopping 50% of the population would like to leave. And Illinois was 2nd from the top with percentage of people who have high intent to actually leave (at 19%.) So if those two groups overlap Illinois could lose 10% of its population in short order!
If ever there was one, this has to be a wake-up call!
The seeds of this problem were sown many years ago. When manufacturing started going offshore, Illinois was hard hit. A Center for Government Studies report shows that between 2000 and 2010 the number of people employed in Illinois actually declined by 115,000 (1.5%). Farming, wholesale and retail trade jobs fell by 135,000. But far worse was the decline in manufacturing jobs, which dropped by a whopping 311,000. Those were jobs which had been Illinois’ growth foundation for 60 years. And they were the employers who provided the network effect of business-to-business growth that kept the state’s virtuous circle spinning.
Despite the obviousness of this shift in employment – from manufacturing to services – the state reacted timidly to replace that employment base with another growth vehicle. In an era of growing financial services, Illinois failed to develop a strong banking sector, and in fact watched First Chicago/Bank One become JPMorganChase and leave – along with almost all its other large brethren. Despite leading engineering universities (University of Illinois Chicago, University of Illinois Urbana/Champaign, Northwestern, Illinois Institute of Technology, Northern Illinois, etc.) Illinois failed to develop a vibrant angel investing or venture capital community, and digital entrepreneurs were pushed toward the coasts for funding – and increasingly the talent followed them out of state.
It did not take long for the virtuous circle to become a stagnation spiral. As jobs left the state there was lower demand for housing, so people couldn’t sell their houses – especially after 2007. The housing bust that racked America hit the Chicago area, and all of Illinois, harder than many metros. And home prices have failed to recover at anything close to the national average. Chicago still leads major metro areas in percentage of homes with underwater mortgages. To maintain money for schools and roads communities were forced to raise property taxes. Today many people, especially in the 6 Chicago “collar counties,” pay property taxes that are higher than similar homes in Los Angeles and San Francisco! Property taxes that have become among the highest in the country.
With no growth in spending, communities raised sales taxes to generate more income. Today most Illinois citizens pay between 9-10% sales tax, again amongst the highest in the country. Which encourages even greater on-line shopping, and deterioration in the local retail trade.
Road maintenance, and general funding at the state level, pushed the state to raise highway tolls. What were $.25 toll machines on major arteries in the 1990s now cost $.75 (tripled) and the rate is double that ($1.50) if you don’t install an electronic toll device in your auto (sorry out-of-state drivers.)
Lacking growth, state income tax receipts could not keep up with state demands – especially for pensions that depended on both a vibrant stock market as well as higher state income. So Illinois doubled the income tax rate in an effort to fund pensions and avoid bankruptcy.
Yet, despite seeing taxes in all areas increase, residents are subject to declining services. Potholes remain an ever-present danger for drivers. Municipal traffic services (buses and rail cars) have increased prices by multiples, yet there are fewer routes and longer waits for customers.
Which leads to an even worse element of stagnation – aging population. As the jobs for people 16-44 declined, younger people left the state and that demographic actually declined by 3.2% between 2000 and 2010. Those who remained were older, so the Baby Boomers grew by 21%! However, this aged demographic is not in its prime “spending” years, and instead is much more likely to invest for retirement. Thus further dampening the local economy.
And, an aging population means that the number of children declined – dramatically. The “baby bust” resulted in a 6.2% decline in children under age 10 in Illinois last decade. Fewer children means less demand for school teachers, and all the things related to child rearing, further shrinking the economic growth prospects. While this is good news for property tax payers generally, it’s never a good sign to see closed schools simply because there’s no need for them.
Now the spiral becomes a self-fulfilling prophecy. Retiring boomers on a fixed income realize that they cannot afford to live in a state with such high, and rising, property taxes. Especially when other states have fixed taxes that are 1/4 to 1/3 what they pay in Illinois. These retirees (or soon to be retirees) discover lower property tax states often have sales taxes that are half what they pay in Illinois. The economics of staying become increasingly difficult to bear – while the benefits of leaving look ever more promising.
Entrepreneurs and business leaders see little reason to move more jobs into Illinois. When looking at facility locations they realize they can receive the same tax breaks almost anywhere, but employees would prefer the lower tax environment of other states – especially sun belt states like Texas which has no income tax. As Illinois offers tax breaks to dinosaurs like Sears, desperately trying to keep jobs despite failing corporate prospects, it becomes increasingly difficult to lure anyone other than small-employing headquarters locations into the state. And personal taxes keep going up to compensate for these ill-conceived legacy company support programs.
No wonder so many people think about leaving Illinois. And we haven’t even mentioned the weather (do you know how to spell P-O-L-A-R V-O-R-T-E-X?)
Growth is a wonderful thing. Everyone prospers when economic growth provides the virtual circle of more cash. But when the market turns toward the stagnation spiral – well it sucks for just about everyone.
Just ask the folks in Detroit – who are now auctioning off empty homes for $1,000 on the internet just to stop ongoing blight that is wrecking the city like an economic tsunami.
There is no simple answer for a declining economy like Illinois. But this was a situation that took over 2 decades to create. Failure to recognize the decline in manufacturing, and shift to digital economy jobs, left political and industry leaders arrogantly thinking everything would be fine. An inability to invest in creating a replacement powerhouse industry means the state has few resources to invest in anything at all now. Unable to leverage local university innovation with a comprehensive and effective program for funding projects has created a veritable slipper-slide from Illinois to California or New York for new graduates.
The answer will take a some time to develop, and implement. But one thing is clear, if Illinois’ leaders don’t come up with something soon there will be even fewer people around, and even greater problems developing. It would be easy to dismiss this Gallup poll, or let community pride keep one from taking its implications seriously. But that would be an even worse mistake. This is a serious wake-up call.
by Adam Hartung | Apr 23, 2014 | Current Affairs, Leadership
Every quarter I have to be reminded that “earnings season” is again upon us. The ritual of public companies announcing their sales and profits from recent quarters that generates a lot of attention in the business press. And I always wonder why this is a big deal.
What really matters to investors, employees, customers and vendors is “what will your business be like next quarter, and year?” We really don’t much care about the past. What we really want to know is “what should we expect in the future?”
For example, two companies announce quarterly results. One has a Price/Earnings (P/E) multiple of 12.8 and a dividend yield of 2.05%. The other has a multiple of 13.0, and a yield of 3.05%. For both companies net earnings overall were pretty much flat, but Earnings Per Share (EPS) improved due to an aggressive stock repurchase program. Both companies say they have new products in the pipeline, but they conservatively estimate full year results for 2014 to be flat or maybe even declining.
Do you know enough to make a decision on whether to buy either stock? Both?
Truthfully, the two companies are Xerox and Apple. Now does it matter?
While both companies have similar results and forward looking statements, how you view that information is affected by your expectations for each company’s future. So, in other words, the actual results are pretty meaningless. They are interpreted through the lens of expectations, which controls your decision.
You can say Xerox has been irrelevant for years, and its products increasingly look unlikely to change its future course, so you are disheartened by results you see as unspectacular and likewise see no reason to own the stock. For Apple you could say the same thing, and bring up the growing competitor sales of Android-based products. Or, you might say that Apple is undervalued because you have great faith in the growth of mobile products sales and you believe new devices will spur Apple to even better results. Whatever your conclusion about the announced earnings, those conclusions are driven by your view of the future – not the actual results.
Another example. Two companies have billions in sales, and devote their discussion of company value to technology and the use of new technology to pioneer new markets. Both companies report they continue a string of losses, and have no projection for when losses will become profits. There are no dividends. There is no P/E multiple, because there is no E. There is no EPS, again because there is no E. One company is losing $12.86/share, the other is losing $.61/share. Again, do these results tell you whether to buy either, one or both?
What if the first one (with the larger losses) is Sears Holdings, and the latter is Tesla? Now, suddenly your view on the data changes – based upon your view of the future. Either Sears is on the precipice of a turnaround to becoming a major on-line retailer that will sell some real estate and leverage the balance of its stores to grow, so you buy it, or you think Sears has lost all relevancy and you don’t buy it. Either you think Tesla is an industry game changer, so you buy it, or you think it is an over-rated fad that will never become big enough to matter and the giant global auto companies will destroy it, so you don’t buy it. It’s your future view that guides your conclusions about past results.
The critical factor when reviewing earnings is actually not the reported results. The critical factor is what you think the future is for these 4 companies. No matter how good or bad the historical results, your decision about whether to own the stock, buy the company products, work for the company or join its vendor program all hinges on your view about the company’s future.
Which makes not only the “earnings season” hoopla foolish, but puts a pronounced question mark on how executives – especially CEOs – in public companies spend their time as it relates to reporting results.
Enormous energy is spent by most CEOs and their staff on managing earnings. From the beginning to the end of every quarter the CFO and his/her staff pour over weekly outcomes in divisions and functions to understand revenues and costs in order to gain advance knowledge on likely results. Then, for the next several days/weeks the CFO’s staff, with the CEO and the leadership team, will pour over those results to make a myriad number of adjustments – from depreciation and amortization to deferring revenue changing tax structures or time-matching various costs – in order to further refine the reported results. Literally thousands of person-hours will be devoted to managing the reported results in order to provide the number they think is most appropriate. And this cycle is repeated every quarter.
But how many hours will be spent by that same CEO and the leadership team managing expectations about the company’s next year? How much time do these leaders spend developing scenarios, and communications, that will describe their vision, in order to manage investor expectations?
While every company has a CFO leading a large organization dedicated to reporting historical results, how many companies have a like-powered C level exec managing the expectations, and leading a large staff to create and deliver communications about the future?
It seems pretty clear that most management teams should consider reallocating their precious resources. Instead of spending so much time managing earnings, they should spend more time managing expectations. If we think about the difference between Xerox and Apple, one is quickly aware of the difference the CEOs made in setting expectations. People still wax eloquently about the future vision for Apple created by CEO Steve Jobs, who’s been dead 2.5 years, while almost no one can tell you the name of Xerox’ CEO. If you think about the difference between Sears and Tesla one only needs to think briefly about the difference between the numbers driven hedge fund manager and cost-cutting CEO Ed Lampert compared with the “visionary” communications of Elon Musk.
Investors should all think long term. Investors should care completely about what the next 3 to 5 years will mean for companies in which they place their money. What sales and earnings are reported from months ago is pretty meaningless. What really matters is what is yet to happen.
What we don’t need is a lot of time spent talking about old earnings. What we need is a lot more time spent talking about the future, and what we should expect from our investments.
by Adam Hartung | Apr 1, 2014 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Web/Tech
“Hope springs eternal in the human breast” (Alexander Pope)
As it does for most investors. People do not like to accept the notion that a business will lose relevancy, and its value will fall. Especially really big companies that are household brand names. Investors, like customers, prefer to think large, established companies will continue to be around, and even do well. It makes everyone feel better to have a optimistic attitude about large, entrenched organizations.
And with such optimism investors have cheered Microsoft for the last 15 months. After a decade of trading up and down around $26/share, Microsoft stock has made a significant upward move to $41 – a new decade-long high. This price has people excited Microsoft will reach the dot.com/internet boom high of $60 in 2000.
After discovering that Windows 8, and the Surface tablet, were nowhere near reaching sales expectations after Christmas 2012 – and that PC sales were declining faster than expected – investors were cheered in 2013 to hear that CEO Steve Ballmer would resign. After much speculation, insider Satya Nadella was named CEO, and he quickly made it clear he was refocusing the company on mobile and cloud. This started the analysts, and investors, on their recent optimistic bent.
CEO Nadella has cut the price of Windows by 70% in order to keep hardware manufacturers on Windows for lower cost machines, and he announced the company’s #1 sales and profit product – Office – was being released on iOS for iPad users. Investors are happy to see this action, as they hope that it will keep PC sales humming. Or at least slow the decline in sales while keeping manufacturers (like HP) in the Microsoft Windows fold. And investors are likewise hopeful that the long awaited Office announcement will mean booming sales of Office 365 for all those Apple products in the installed base.
But, there’s a lot more needed for Microsoft to succeed than these announcements. While Microsoft is the world’s #1 software company, it is still under considerable threat and its long-term viability remains unsure.
Windows is in a tough spot. After this price decline, Microsoft will need to increase sales volume by 2.5X to recoup lost profits. Meanwhile, Chrome laptops are considerably cheaper for customers and more profitable for manufacturers. And whether this price cut will have any impact on the decline in PC sales is unclear, as users are switching to mobile products for ease-of-use reasons that go far beyond price. Microsoft has taken an action to defend and extend its installed base of manufacturers who have been threatening to move, but the impact on profits is still likely to be negative and PC sales are still going to decline.
Meanwhile, the move to offer Office on iOS is clearly another offer to defend the installed Office marketplace, and unlikely to create a lot of incremental revenue and profit growth. The PC market has long been much bigger than tablets, and almost every PC had Office installed. Shrinking at 12-14% means a lot less Windows Office is being sold. And, In tablets iOS is not 100% of the market, as Android has substantial share. Offering Office on iOS reaches a lot of potential machines, but certainly not 100% as has been the case with PCs.
Further, while there are folks who look forward to running Office on an iOS device, Office is not without competition. Both Apple and Google offer competitive products to Office, and the price is free. For price sensitive users, both individuals and corporations, after 4 years of using competitive products it is by no means a given they all are ready to pay $60-$100 per device per year. Yes, there will be Office sales Microsoft did not previously have, but whether it will be large enough to cover the declining sales of Office on the PC is far from clear. And whether current pricing is viable is far, far from certain.
While these Microsoft products are the easiest for consumers to understand, Nadella’s move to make Microsoft successful in the mobile/cloud world requires succeeding with cloud products sold to corporations and software-as-service providers. Here Microsoft is late, and facing substantial competition as well.
Just last week Google cut the price of its Compute Engine cloud infrastructure (IaaS) platform and App Engine cloud app platform (PaaS) products 30-32%. Google cut the price of its Cloud Storage and BigQuery (big data analytics) services by 68% and 85% as it competes headlong for customers with Amazon. Amazon, which has the first-mover position and large customers including the U.S. federal government, cut prices within 24 hours for its EC2 cloud computing service by 30%, and for its S3 storage service by over 50%. Amazon also reduced prices on its RDS database service approximately 28%, and its Elasticache caching service by over 33%.
To remain competitive, Microsoft had to react this week by chopping prices on its Azure cloud computing products 27%-35%, reducing cloud storage pricing 44%-65%, and whacking prices on its Windows and Linux memory-intensive computing products 27%-35%. While these products have allowed the networking division formerly run by now CEO Nadella to be profitable, it will be increasingly difficult to maintain old profit levels on existing customers, and even a tougher problem to profitably steal share from the early cloud leaders – even as the market grows.
While optimism has grown for Microsoft fans, and the share price has moved distinctly higher, it is smart to look at other market leaders who obtained investor favorability, only to quickly lose it.
Blackberry was known as RIM (Research in Motion) in June, 2007 when the iPhone was launched. RIM was the market leader, a near monopoly in smart phones, and its stock was riding high at $70. In August, 2007, on the back of its dominant status, the stock split – and moved on to a split adjusted $140 by end of 2008. But by 2010, as competition with iOS and Android took its toll RIM was back to $80 (and below.) Today the rechristened company trades for $8.
Sears was once the country’s largest and most successful retailer. By 2004 much of the luster was coming off when KMart purchased the company and took its name, trading at only $20/share. Following great enthusiasm for a new CEO (Ed Lampert) investors flocked to the stock, sure it would take advantage of historical brands such as DieHard, Kenmore and Craftsman, plus leverage its substantial real estate asset base. By 2007 the stock had risen to $180 (a 9x gain.) But competition was taking its toll on Sears, despite its great legacy, and sales/store started to decline, total sales started declining and profits turned to losses which began to stretch into 20 straight quarters of negative numbers. Meanwhile, demand for retail space declined, and prices declined, cutting the value of those historical assets. By 2009 the stock had dropped back to $40, and still trades around that value today — as some wonder if Sears can avoid bankruptcy.
Best Buy was a tremendous success in its early years, grew quickly and built a loyal customer base as the #1 retail electronics purveyor. But streaming video and music decimated CD and DVD sales. On-line retailers took a huge bite out of consumer electronic sales. By January, 2013 the stock traded at $13. A change of CEO, and promises of new formats and store revitalization propped up optimism amongst investors and by November, 2014 the stock was at $44. However, market trends – which had been in place for several years – did not change and as store sales lagged the stock dropped, today trading at only $25.
Microsoft has a great legacy. It’s products were market leaders. But the market has shifted – substantially. So far new management has only shown incremental efforts to defend its historical business with product extensions – which are up against tremendous competition that in these new markets have a tremendous lead. Microsoft so far is still losing money in on-line and gaming (xBox) where it has lost almost all its top leadership since 2014 began and has been forced to re-organize. Nadella has yet to show any new products that will create new markets in order to “turn the tide” of sales and profits that are under threat of eventual extinction by ever-more-capable mobile products.
While optimism springs eternal long-term investors would be smart to be skeptical about this recent improvement in the stock price. Things could easily go from mediocre to worse in these extremely competitive global tech markets, leaving Microsoft optimists with broken dreams, broken hearts and broken portfolios.
Update: On April 2 Microsoft announced it is providing Windows for free to all manufacturers with a 9″ or smaller display. This is an action to help keep Microsoft competitive in the mobile marketplace – but it does little for Microsoft profitability. Android from Google may be free, but Google’s business is built on ad sales – not software sales – and that’s dramatically different from Microsoft that relies almost entirely on Windows and Office for its profitability
Update: April 3 CRN (Computer Reseller News) reviewed Office products for iOS – “We predict that once the novelty of “Office for iPad” wears off, companies will go back to relying on the humble, hard-working third parties building apps that are as stable, as handsome and far more capable than those of Redmond. It’s not that hard to do.”
